The Pros and Cons of Immediate Annuities

Immediate annuities can provide lifelong cash flow. However, many people consider them to be illiquid and irreversible. That is, once you invest, say, $400,000 in return for $2,000 a month for the rest of your life, you may be locked into that arrangement, with no access to your invested capital.

Some insurance companies have developed immediate annuities that address these concerns. There may be access to your capital at the fifth, 10th, and 15th anniversary of the first payment. On those dates, investors can get a lump-sum that will, in turn, reduce future payouts.

Suppose George, age 65, invests $400,000 in a single-life annuity. At age 70, he might be offered a chance to take out up to $100,000, if he needs cash for some reason. If he chooses a withdrawal, his future monthly payments would be lower.

Therefore, if you like the idea of buying an immediate annuity but are wary of locking up the money to purchase it, ask the insurer if there is a liquidity option.

In addition, you may wish to consider other alternatives, if you are willing to accept a smaller payout.

* Straight life. A 65-year-old male can invest $250,000 in an immediate annuity and receive about $20,000 a year as long as he lives. There are no survivor benefits.

* Cash refund. Suppose that man pays $250,000 and dies after receiving $50,000 in payments. His beneficiary would receive the $200,000 shortfall. With this option, annual payments would drop to approximately $19,000.

* Joint life. If that 65-year-old has a 65-year-old wife, they can buy an annuity that will pay as long as either is alive. The annual payout will fall to around $17,000 a year, on a $250,000 investment.

* Single life, inflation indexed. With this version, payments would begin at around $15,000 a year, for a 65-year-old male investing $250,000. However, the payments will increase each year, to keep up with inflation.